Retirement Blog

Finance Blogs » Retirement » Federal workers’ Roth complex

Federal workers’ Roth complex

By Jennie L. Phipps · Bankrate.com
Friday, February 15, 2013
Posted: 2 pm ET

If you think your 401(k) is complicated, then you don't work for the federal government. Retirement planning for people employed by Uncle Sam has a whole different set of befuddling rules.

The federal answer to the 401(k) is the Thrift Savings Plan, known as TSP. In 2012, it added a Roth option that Carol Schmidlin, president of Franklin Planning, says is a wonderful retirement planning tool with some baffling provisions.

There is no income cap restriction for contributors to Roth TSPs as there is with Roth individual retirement accounts, but the contribution limits are the same regardless of income -- those who are younger than 50 can put away $17,500 a year. Those over 50 can save $23,000.

Schmidlin says one of the most confusing aspects of the Roth is the rule that requires a participant to leave money in the Roth TSP for at least five years from the date of the first contribution in order to take penalty-free distributions -- even if the person is 59 1/2 or older.

When people contemplate opening a Roth TSP, Schmidlin says that limitation is often a concern. But a participant can get around the problem if she no longer works for the federal government. That participant can first roll her account into a Roth IRA, which doesn't have this limitation.

Current distribution rules also require savers who have both traditional and Roth TSPs to take out money proportionately. For instance, if they have $50,000 in a Roth TSP and $50,000 in a traditional TSP, they'll be required to take half of every distribution from each, paying taxes on the traditional part.

So far, there is no provision for converting from a regular TSP to a Roth TSP, although Schmidlin thinks that's coming. And as long as you are retired or otherwise separated from the federal government, you can roll the total amount into a Roth IRA to avoid these distribution rules.

You better believe, Uncle Sam knows complicated.

«
»
Bankrate wants to hear from you and encourages comments. We ask that you stay on topic, respect other people's opinions, and avoid profanity, offensive statements, and illegal content. Please keep in mind that we reserve the right to (but are not obligated to) edit or delete your comments. Please avoid posting private or confidential information, and also keep in mind that anything you post may be disclosed, published, transmitted or reused.

By submitting a post, you agree to be bound by Bankrate's terms of use. Please refer to Bankrate's privacy policy for more information regarding Bankrate's privacy practices.
1 Comment
Carolyn Gorman
February 15, 2013 at 6:14 pm

How does the requirement that you take proportional distribution amounts from your regular taxable TSP and your Roth TSP work if you are a retired federal worker under 59 1/2 (or even under 55) and you decide to take SEPP payouts every month in connection with the provisions of 72t of the IRS tax code? Say, you make your Roth contributions when you are 49 or 50 years old. You take early retirement at 50 or 51 but want to start drawing SEPP payments from TSP either right away or within a few years. If you have to take proportionally from both sides of your TSP, yet you cannot touch the Roth contributions until after 59 1/2, then how do you reconcile those two seemingly conflicting requirements?